Let’s Not Underestimate The Human Element in Underwriting

As modern risk professionals, we pride ourselves on making decisions that are informed by granular risk data, actuarial analysis and complex computer models. Yet, we have discovered that these quantitative elements unfortunately represent only half the decision making process. The "Human Factor or Human Element" in insurance underwriting is the other half. Ever since the mid-2000s, I have been wondering how we can address the invisible thinking that affects our underwriting judgment.

It was during that time - working through renewals with Gen Re’s team in London - that I realized that we started giving away rate and terms and conditions primarily because, almost unknowingly, we had been “anchored” by what we were hearing in the market. Because of these market pressures, I believe that we initiated each renewal with a certain percentage reduction already in mind, which we were subsequently unable to adjust away from even if we thought the reduction was unwarranted. That was when it dawned on me that the judgment we applied to quantitative models deserved as much attention as the models themselves.

It was in 2006 that we held our first event on the subject of decision biases with customers. Our choice of keynote speaker may have demonstrated good judgment; it was Nassim Taleb, a year before he published his international bestseller, “The Black Swan.”

We’ve sustained our interest in decision biases ever since. If anything, we have become more curious, and we have started to use relevant insights to shape performance at Gen Re.

Right now, for example, we are reflecting on how a softening market may encourage particular ways of thinking about the right price for risk.

Personal experience suggests to me that our emotions will come in to play more intensively in a softening market, simply because competing aspects of pricing decisions may influence our thinking - such as failing to meet individual goals, satisfying a customer’s needs or meeting revenue targets.

My understanding of the neuroscience of emotions suggests that we all have to tap into how we feel about a decision before we are able to make a decision. Antonio Damasio has documented numerous cases of individuals who have sustained brain damage to areas of the brain that are critical to experiencing emotion. After their injuries, these patients were fully capable of engaging in rational analysis. But, deprived of access to their emotional selves, they became completely unable to make even the simplest decisions, such as choosing between two dates for an appointment, or what clothes to wear on different occasions.

I am not an expert in neuroscience, but it seems obvious to me that our decisions are that much more fallible when we feel something important is at stake, and therefore when our emotions are high - and isn’t that the typical softening market playbook?

That said, my experience also suggests that such reflection should not be confined to narrow areas of focus. At Gen Re we have learned first-hand that much of how we see, think and act occurs at the level of the subconscious, meaning that it is effectively invisible to what we consider to be our thinking brains.

So, when we singled out 12 decision making biases that may influence the quality of our underwriting processes, we are finding that training and exposure to the concepts are very important first steps to better performance. However, our work internally and with some customers indicates that this is only the beginning of the journey.

From our perspective now, we realize that awareness of decision bias in oneself and in others is not enough to guarantee better decision making. Like the other industries that have embraced a Human Factors perspective, we have learned that we cannot tell people to make better decisions - simply because it is difficult for decision makers to control subconscious processes. But, in the same way that we can all be encouraged to change our eating habits by dining off smaller plates, we can change the context in which people work to encourage the behaviors we (and they) would like to engage in and, over time, encourage new subconscious processes to replace the old.

Once we absorbed that lesson, we also realized that this work extended way beyond correcting for possible decision bias. Insights to how we see, think and act affect how we work together in teams, how engaged we are at work, how culture works and how culture can evolve and, indeed, how our customers might make better underwriting decisions. The journey towards better judgment continues - as a team sport.

Back in the mid-2000s, if I could have seen Big Data coming before my realization that the judgment we applied to quantitative models deserved more attention, I would likely have assumed the companies best placed to take advantage of Big Data would have been those with the best analytics. Now I’m not so sure.

Yes, we will have more structured and unstructured information at our fingertips. But we’ve held for many years that a healthy skepticism ought to be applied to the output of increasingly complex risk models. And, by dint of experience, we are more convinced than ever that we will still require human and quantitative factors to work together across individuals and teams - in contexts that create the right culture to produce better performance.

At Gen Re our work with our own underwriters on the Human Factor in underwriting continues to gain pace. We are now getting ready to share our learnings and engage in a conversation with our customers, just like we do with the rest of our underwriting, ERM and claims expertise. Over the coming months we will be making a start by sharing more about the biases we mentioned above on our blog, ultimately with a view to taking to a wider group the conversation about how Human Elements can influence both single risk decisions and the performance of an entire organization.